With a different housing (or construction) number released every day but Friday this week, let’s take a look at a homebuilder that’s scheduled to post its quarterly earnings this morning before the opening bell—Toll Brothers (TOL), which specialize in high-end homes and housing developments.

There’s been concern in some quarters about the ongoing health of the housing market because of (among other factors) rising interest rates and changes in the mortgage interest deduction. The New Home Sales for January report released yesterday came in at 593k vs. 643k, a decline from the past two months and a “surprise” 1% drop in sales from last January. The news temporarily weighed on indexes (and TOL) when it came out around 10 a.m. ET, but the market quickly recovered.

Digging below the report’s surface reveals some positive details, though—for example, sales in the $750,000-plus category (that’s TOL country) were steady from December, suggesting “there hasn't been any real impact so far from the mortgage interest deduction cap kicking in for mortgages over $750,000.”1 Also, last month’s sales were revised upward by 18,000.2 The rest of the week’s numbers should help flesh out the current picture.

A weekly chart of TOL (below), which rallied 55% last year and was up more than 9% this year before the February correction, shows the stock has generally tracked the major fortunes of the housing industry—its boom in the early 2000s, subsequent collapse, and its climb back to current levels. TOL’s year-to-date high above $52 was the loftiest level the stock had reached since 2005.

Source: OptionsHouse

Now let’s consider the earnings picture. Toll Bros. has gotten some upward earnings revisions recently, which some analysts see as a sign a company may beat earnings estimates.3 Since December 2010, TOL has topped earnings estimates 19 times, missed earnings nine times, and equaled earnings estimates twice. For all 30 of these quarterly reports, here’s how the stock’s price action broke down before and after earnings day:

●The stock closed higher the day before earnings (in this case, yesterday) 63% of the time.

●The stock opened higher on earnings day 70% of the time, with an average gain of 0.95% from the previous day’s close.

●In contrast, the stock closed below the open on earnings day 57% of the time, with an average move of -0.63%.

●Five days after earnings, the stock was lower than the close of earnings day more than 53% of the time, with a median return of -0.47%.

In other words, the stock had a tendency to trade higher the day before earnings, jump higher on the open on earnings day, but then weaken—sometimes for the remainder of the session on earnings day, and/or the next few days.

Source: OptionsHouse

If we break down these results between the 19 earnings beats and the 11 earnings misses or earnings “meets,” we find the results after earnings beats are similar to those above, except the bullish tendencies are even more bullish and the bearish tendencies are more bearish. The other interesting behavior occurred after those 11 earning misses/meets:

●The stock opened higher on earnings day only 45% of the time, with an average loss of -1.17% from the previous day’s close.

●The stock closed higher than the open on earnings day 45% of the time, with an average change of -1.13%.

●Five days after earnings, the stock was above the close of earnings days seven out of 11 times (64%), with an average return of 0.92%.

The lower open (and close) on earnings day after a miss is no surprise, but the more bullish return after five days might be a bit of an eye-opener for some traders. Overall, one way to summarize TOL’s short-term behavior after earnings is:

●When the stock beats earnings, prices initially jump, then often give back that gain.

●When the stock misses earnings, prices initially fall, then tend to trade more bullishly over the next several days than they do after earnings beats.

Traders need catalysts to drive moves. In this case, there are a few at play: the short-term dynamics surrounding TOL’s earnings release, lots of housing market news, and the stock-market rebound.

Should be a busy time in the homebuilding sector.

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1 Briefing.com. New Home Sales. 2/26/18.

2 Econoday. New Home Sales. 2/26/18.

3 Zacks. Why Earnings Season Could Be Great for Toll Brothers (TOL). 2/23/18.

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